What Is an Excise Tax, and Can It Save Health Reform?

The Baucus proposal is, at long last, starting to snap into view. And it's ... pretty much what it was back on June 18, when an early outline emerged. Subsidies to 300 percent of poverty. Medicaid to 133 percent of poverty. Insurance market regulations. Prevention. Wellness. Exchanges. If no Republicans sign on to this bill, it will be hard to view the past few months as anything but wasted time in which the president's poll numbers got hammered and health-care reform became more difficult.

The big question, though, is how Max Baucus solves the money problem. Early word is that the plan will cost $850 billion to $900 billion. That's a lot of health care to fund. And the two largest potential sources of funding -- new taxes on income or a cap on the exclusion for employer health spending -- both seem DOA in Baucus's committee.

The answer, it seems, is an excise tax on insurance companies offering high-cost plans. The best way to explain this is that the American political system is a little bit stupid, and so we're going to do a good thing in an inefficient way in order to say that we're taxing insurance companies rather than workers, even though the end result will be the same.

The Center for Budget and Policy Priorities has a good explainer on how an excise tax would work. It gives this example:

Consider, for example, an excise tax of 35 percent on insurers offering family policies that cost more than $21,000. An insurer offering family policies that cost $21,000 or less would pay no tax. If a policy cost $22,000, the insurer would pay $350 (35 percent of the $1,000 excess over $21,000) per policy. For a policy that cost $25,000, the insurer would pay $1,400 (35 percent of $4,000).

What you'll notice is that that sounds a lot like capping the employer tax exclusion on plans that cost more than $21,000. In that case, those plans would cost more for the employer because they wouldn't be tax-free, and so the employer would either make workers pay more for them or steer workers toward cheaper plans. In this case, the insurer will make the employer pay more for plans over $21,000 because such plans will cost the insurer more. The employer, in turn, will either make the worker pay more or steer them toward cheaper plans.

So why go this route? It's unpopular to "tax" a benefit that workers get. It's popular to tax insurers, or at least it seems like it might be. What you lose in simplicity you make up in poll numbers. Baucus is doing the best he can with a bit of a bad hand on the funding side.

I'm going to take the rest of Labor Day off, but more on the Baucus plan tomorrow, by which point the details should be out. For now, it's worth noting that centrist Democrat Max Baucus is proposing spending $900 billion over 10 years to help low-income Americans afford health-care coverage and avoid medical bankruptcy. This bill is not going to be perfect, but it's going to be a big step forward.

"This bill is not going to be perfect, but it's going to be a big step forward."

It's not a bill. It hasn't gone through the Gang of Sick meatgrinder, let alone Senate Finance. We have to wait for what co-Presidents Grassley, Enzi and Snowe have decided first, and then see if it gets the blessing of co-President Ben Nelson.

Ezra: In posting about this "big step forward," you neglect to mention a lack of a public option or even a trigger here, despite the fact you've maintained as late as last month there'd be a public option in the final legislation. The single most glaring feature of the Baucus plan and you say nary a word about it?

Don't you owe your readers more than just more of the same: chirpy, glib cheerleading, "A bad bill is better than no bill at all?"

This bill will be like buying your teenager a used care with a broken axil.

Sure a broken car seems like a big step up form no car. It has 80% of what you want in a car. But you teenager is not going to be happy you bought them a car, they are going to be pissed you gave them a broken car.

$900 billion to insure 10 million low-income US citizens? That doesn't sound like a good deal. Baucus's plan will make prove the lie -- if you like the coverage you have now, you can keep it. Well, you are talking about taking away cadillac plans. What about the unions --- let me guess, the cadillac plans of the unions will be exempt???

Oh, that will be hysterical to watch the libs sell that to middle America. Pathetic idiots -- the liberals are truly the dog chasing their own tails -- trying to screw the working people but making sure the unions are protected. YOu want to see plummeting approval ratings!?

No, the big Health Care Reform Scare of 2009 is over. Pretty much all you're going to see now is more of what you've seen in the past, with the addition of mandates forcing Americans to buy insurance This is nature's way of making sure that no matter how bad off the Republicans get, the Democrats will do something equally stupid to restore the balance.

Republicans are going to have a field day with this at the mid-terms. They will let the Democrats stand absolutely alone in enacting a POS bill that totally infuriates millions of Americans who are forced to buy a substandard product. And for once in my life I really can't blame them- this really is just another tax on the citizen and give-away to the industries.

Now, let's be clear about these "co-ops". You don't need a federal law to set up a medical co-op- any halfway intelligent lawyer, or even a sharp private citizen could set one up by incorporating in their state, which usually costs a few hundred dollars in incorporation fees.

So, why don't we have health care co-ops? Because they don't make any sense. Don't be fooled by Group Health of Seattle. Group Health was a member-owned co-op in 1949 and even in 1960, but by 1975 Group Health had become a corporation selling health care plans to the Boeing Company, whose workers were not required to buy shares, and only requiring private subscribers to buy shares.

And as a corporation selling health care plans, Group Health works about like all the rest of them- the premiums are about the same, the care is about the same, and the results are as undistinguished as you would expect when your insurer tells you to pick from a pool of pre-approved providers in your area. The only thing that changes any of this is that Group Health is a teaching hospital affiliated with the University of Washington, which has nothing to do with the fact that it is a co-op.

I'm going to go out on a limb here and say the Gang of Six and the Blue Dog Democrats have got Obama's number, and there'll be no reform tonight.

-- The info on the excise tax as one of the few details leaked thus far is a clear trial balloon. Your words were charitable-- "the political system is stupid"-- instead of the more direct-- Obama is playing typical Washington politics because he's scared of breaking a (foolish) campaign pledge. So the excise tax trial balloon is to determine whether the resulting coverage this week will show this as a distinction without a difference-- i.e. MSM coverage moves to a plainspeak "Obama is breaking a campaign promise"-- or whether the "insurance company tax" can be pulled off politically.

-- I'll await to see the geographic distribution of this proposal. Similar proposals at more aggressive levels showed a handful of states, many in New England, were severely disproportionately affected by this proposal. Enough for the Dodds and Kerrys to take notice. It will be interesting to see what happens with this proposal.

Taxing a company is not the same as taxing the consumer of that company's goods, especially if the company has some monopoly power (and most have a significant amount).

Health insurance companies have a lot of monopoly power, so they're going to eat some of this tax out of profits.

Briefly, the intuition is this: A monopolist will have already raised price as much as it can; any higher and the lost sales will outweigh the increased revenue per sale. When a per unit tax is added, it's not optimal for the monopolist to pass on the whole thing if they face a typical demand curve where the slope is constantly decreasing (and there's no jump in unit marginal costs). They just lose too much in sales.

A perfectly competitive company is forced to pass the entire tax on to consumers, because they are already at price=marginal cost. If marginal cost goes up by X, then price has to also, or they will lose money. But a monopolist is starting at price well above marginal cost, so if the marginal cost goes up by X, they aren't forced to raise their price by X; they have other options, which may be more profitable because they don't squelch demand as much.

To verify check an undergrad Microeconomics book, here's a web scan of one:

WHO IS PAYING $21,000 a year for a family policy? People with cancer. People between 55 and 65 yrs old with high school/college kids. Or REALLY coddled employees at very successful companies.

And that's about it. How many of these $21,000+ policies are in existence today?

This is a non-tax, Ezra. A manipulative joke, but not a tax that means anything because hardly any family is charged such a fee - unless they are really sick and really well-off. The really sick people who NEED this policy and are not well off cannot afford it at all and have thus joined the ranks of the uninsured....

i really wish people who don't have a clue about insurance would stop talking about insurance. Its why you'll never see me in a quantum physics chat room. This is a nice start but insurers have already been increasing the prices of these cadillac plans way more than the actual costs would merit, and to either unions or the elite's elite they don't care, they keep paying. I'd rather see them tax them directly but now Obama and the Democrats can technically say they didn't bypass a campaign pledge.

Oh and for the record I'd favor a trigger plan to a co-op. A trigger would put the fear of their demise in insurers heads and would force them to control costs. And as the only entity in the US to ever have done that they certainly can do it. Let them play the bad guy, they do it well.

serialcatowner: "Now, let's be clear about these "co-ops". You don't need a federal law to set up a medical co-op- any halfway intelligent lawyer, or even a sharp private citizen could set one up by incorporating in their state, which usually costs a few hundred dollars in incorporation fees.

"So, why don't we have health care co-ops? Because they don't make any sense."

I'm not going to argue whether co-ops would be as effective as a public plan. But I think it's pretty obvious why it takes more than a few hundred dollars in fees to set one up.

To compete, you have to be able to bargain, because the existing companies can bargain. To bargain, you need either to be big or have reserves to draw on. No entity is going to bargain with a co-op that is just starting to sign people up, and people won't sign up if the co-op has to charge higher premiums because it can't yet drive good deals. So yes, there are other good reasons than "they don't work" to explain why we don't have more co-ops competing in markets that are mostly dominated by only one or two insurers.

Also, regarding Group Health of Seattle: perhaps it's representative of how co-ops are not that effective. But I'm wary of generalizing from a sample size of one. If the idea of a public plan is that it would be not-for-profit and big enough to bargain to hold down costs, I'm not sure why it would matter whether it's administered by the government or by a private board. I'd be glad to have someone explain it to me. Some European countries have a competitive private non-profit insurance system, and they seem to work pretty well.

"Max Baucus is proposing spending $900 billion over 10 years to help low-income Americans..."

On the other hand everyone will be forced to buy overpriced insurance, and soon it will be clear that $900 billion falls far short of what's needed to provide adequate subsidies. As soon as the general public wraps their head around this, health care reform is dead.

"Max Baucus is proposing spending $900 billion over 10 years to help low-income Americans..."

And Ezra calls that "a big step forward." $900 billion with the requirement that the middle class pay up to $23,000 a year for insurance.

And this: "I'm not yet certain that there's no trigger or co-op stuff..."

Politico: "As expected, Baucus’ proposal does not include a public insurance option, but instead features insurance cooperatives that could appeal to moderate Democrats and perhaps some Republicans."

There are co-ops. It has no public option but when this bill is eventually reconciled with the HELP bill, which does have a public option, it's very likely that the Senate will split the difference and consider a triggered public option as meeting halfway.

Just want to note - this is not "reforming the system." This is adding the uninsured to a bloated and inefficient system. And then taxing the employers who offer plans that cost more than $21K. Which will bring in no money at all to speak off, since those kinds of policies are not at all common within the vast numbers of the middle class.

So we're adding a lot more people without figuring out a valid way to pay for them.

Do you wonder why there's no push for this kind of bill coming from a financially struggling middle class?

Sorry, I'm rusty on this stuff, and doing this fast between Labor Day festivities. It's true that the monopolist won't pass on a per unit tax 100%, with a standard demand curve, etc, and the monopolist will take a bite out of its profits.

But, I think the same bite occurs and the same after-tax price is reached if the tax is placed on the consumer. It still hurts the monopolist by lowering the demand curve.

In any case, this assumes perfect rationality, no frictions, perfect info, etc. In the real world the tax, if placed on the monopolist (or firm with monopoly power) might hurt the firm more, as the resulting price increase creates anger against the firm as opposed to against the government if the tax were placed on the consumer.

I'm confused as to why it's a good thing to tax expensive plans. I understand why it would be a good thing to tax employer-provided health insurance in general. But to only tax the good plans? Shouldn't we actually be encouraging these expensive plans, because they are the ones with low or zero cost-sharing? Isn't this just going to drive more people into junk insurance with unreasonable cost-sharing provisions?

From a comment above: "Similar proposals at more aggressive levels showed a handful of states, many in New England, were severely disproportionately affected by this proposal."

For argument... philosophically, is it bad that the most vigorous proponents of doing a thing are disproportionately affected by the doing of it?

A study entitled “The Prognosis for National Health Insurance: A Virginia Perspective,” is scheduled for release today at an 11 a.m. by the Virginia Institute for Public Policy and is said to state that “Reformers must ensure that changes to help the 15 percent of Americans who do not have insurance coverage do not make the vast majority of Americans worse off”. Authored in part by formerly Reagan-affiliated members of the firm Arduin, Laffer & Moore Econometrics, the study is said to show that "Every man, woman and child in Virginia would pay $275 for the state’s share of the health care reforms" as proposed by the House.

With a tax on insurers being used to fund expansion of Medicaid and subsidies for those with low-income, and health insurance regulations, don't you essentially achieve all the goals of the public option?

dasimon, @ 9.06 pm Sept 7- yes, but after you've done all that, you don't have a co-op, you have a managed-care insurance network. Group Health can't crack the Tacoma market because Multicare has stitched together a dozen hospitals and a hundred clinics to do about the same thing.

Yes, it's sad to have sample size of one. Gee, it just make you wonder why people haven't come up with another example of a health care co-op in the US we could study...

The simple fact is that health care and co-ops don't share common ground here. I was a Group Health member for thirty years, and I have lived, worked, and shopped at co-ops. They are different things.

serialcatowner: "but after you've done all that, you don't have a co-op, you have a managed-care insurance network. Group Health can't crack the Tacoma market because Multicare has stitched together a dozen hospitals and a hundred clinics to do about the same thing."

That's the "it doesn't work" argument. If it doesn't work, fine. But I was addressing the "why don't people do it if it only costs a few hundred dollars to file some papers" argument, which I thought was not addressed--because even if co-ops did work (and I'm withholding judgment on that), you still couldn't start one up without sufficient bargaining power to compete, and for that one needs size and resources amounting to far more than a few hundred dollars.